Monthly Fund Commentary State Street Floating Rate Fund
Overview
In June, the State Street Floating Rate Fund returned 0.71% (net), outperforming the benchmark by 0.38%.1 With the RBA cutting the cash rate in late May from 4.10% to 3.85%, Floating Rate Notes (FRNs) benefited from a lagged adjustment in coupon resets. This meant that FRNs not resetting in June continued paying coupons based on previously higher benchmark rate, supporting income.
In addition, with the market expecting further rate cuts, spreads tightened and the money market yield curve steepened, delivering capital gains on FRNs with longer reset dates and higher spreads. In response to this, we extended spread duration in the portfolio and continued allocating to international banks offering relatively higher yields.
Since the State Street Floating Rate Fund’s inception in October 2017, it has returned +2.77% p.a., outperforming the benchmark by 0.87% p.a.
Looking Ahead
Market Update and Outlook
June marked the eighth consecutive month of positive returns for Australian fixed income. The Bloomberg AusBond Treasury 0+ Yr Index returned +0.78%, while the AusBond Composite delivered +0.75%. Gains were driven by a combination of expectations that the RBA will cut the cash rate again in July, along with easing geopolitical tensions and declining oil prices, which helped lower inflation expectations.
While the RBA did not meet in June, there was still plenty for markets to contemplate as the meeting minutes revealed that the Board debated the possibility of a larger 50bp cut instead of the 25bp rate cut in May. This was a dovish tilt in the Board’s stance, reflecting a shift toward front-loading policy easing to insure against downside risks. While the Board had considered a 50bp cut, it ultimately opted for a 25bp reduction, citing the importance of maintaining predictability in monetary policy amid ongoing uncertainty
On the data side, signs of deceleration are emerging, though a number of key indicators remain resilient — namely employment. May’s jobs report surprised with a -2.5k decline, following April’s +89k surge, yet the unemployment rate held steady at 4.1%. GDP growth for Q1 came in at just +0.2% QoQ, down from +0.6%, confirming a broader slowdown in domestic activity. However, analysts noted that extreme weather events likely weighed on growth, suggesting a possible Q2 rebound. Inflation also eased, with monthly headline CPI falling to 2.1% YoY, down from 2.4%, and trimmed mean inflation dropping from 2.8% to 2.4%, reinforcing the RBA’s view that inflation is now sustainably within target.
Looking ahead, markets and commentary suggest further cuts are likely as the RBA looks to narrow the gap towards the neutral rate of interest. In our view, this is prudent given the persistent uncertainty, subdued inflation, and the RBA’s dual mandate, which includes ensuring full employment.
Bottom Line
Consistency in life and investing pays off. As Confucius said, “It does not matter how slowly you go as long as you do not stop.” In investing, that means favouring strategies that endure, not just excite.
FRNs have proven their worth in this regard. While the MOVE Index (see Figure 1) reminds us that bond market volatility remains high, FRNs have quietly outperformed both the AusBond Composite and AusBond Treasury indices over the past 10 years (see Figure 2). Their low duration, strong credit quality and stable income make them a cornerstone for portfolios seeking resilience over reaction.
Figure 1: Bond Market Volatility
